TAX 9869 Lecture Notes - Lecture 28: Income Tax, Withholding Tax, Foreign Tax Credit
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▪ If a TP is one where they have the ability to take FTC,
almost always it makes sense to take FTC
▪ They may have paid foreign tax but maybe do not have
enough/no foreign source income, have a lot of expenses
to be allocated
▪ There are situations where you have earned income
outside of US, pay tax, but because of the way expense
allocation rules works, you would've allocated expenses
against foreign source income but you may have no
foreign source income, you will have foreignt taxes paid
but can’t take credit
• Interest expense: is allocated to US source income
and foreign source income no matter what
• Money is fungible and you can do whatever you
want with your $
• could have had $1000 of services in Japan and paid
Japanese tax but bc US company has interest
expense it may be allocated against that $1000,
causing it to be (0) or (-) in foreign source basket
• If that happens, no foreign source income
• In this situation, TP may say i cant get credit
anyway… might as well take deduction
▪ Another reason, might take deduction in lieu of credit:
Maybe not paying US tax...paying foreign tax because
earn income outside US but not paying US tax bc they
are in a loss
▪ US source basket is 0 or (-)
• Compare (-) number to your foreign source basket
maybe US source loss is greater/excess than FSI
so have overall, a loss
• Don’t need to take credit, deduction
▪ Are foreign taxes paid in foreign currency, how do you
determine that in USD?
• It’s the average exchange rate of the year
• Figure out US tax in US $s
▪ Do states allow FTC? State by state basis- some states
exclude deduction, others don’t…
• GR: yes but its state by state
▪ HAS to be income tax or tax in lieu of an income tax
1. Income tax= tax imposed on income
o Cannot be a sales tax
o VAT(Value added tax, typically other countries have it) IS
NOT AN INCOME TAX (ON TEST), THEREFORE, CANNOT
TAKE AS A CREDIT
▪ You SHOULD take it as a deduction
o Has to be an income tax
o Real property tax paid in foreign country
▪ NOT CREDIT
▪ CAN be taken as a deduction
▪ I have a house, it has value, you pay real estate taxes
o Make determination of income tax or not
2. ONLY PERSON WHO CAN TAKE IS PERSON WHO PAID TAX
o Can be paid or accrued
o HAS to be company who paid tax
o If you want to shift in a group who pays tax, can’t take credit
because not your tax liability
o You have to be the technical TP
3. MANDATORY/COMPULSORY/REQUIRED BY FOREIGN GOV